Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost-of-capital of 15%. Selected financial information (in thousands of dollars) for the first year of business follows:

	East	West
Sales revenue	$ 1000	$ 5000
Income	$ 200	$ 390
Investment (beginning of year)	$ 2000	$ 3000
Current liabilities (beginning of year)	$ 200	$ 200
R&D expenditures (note a)	$ 500	$ 400

Required:

Evaluate the performance of the East division assuming BMI uses residual income. (Negative amounts should be indicated by a minus sign.)

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Question 21 pts

Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost-of-capital of 15%. Selected financial information (in thousands of dollars) for the first year of business follows:

	East	West
Sales revenue	$ 1000	$ 5000
Income	$ 200	$ 390
Investment (beginning of year)	$ 2000	$ 3000
Current liabilities (beginning of year)	$ 200	$ 200
R&D expenditures (note a)	$ 500	$ 400

Required:

Evaluate the performance of the East division assuming BMI uses ROI.

(Enter ROI as a decimal [example .560 is 56%] Do not enter a % sign. Negative amounts should be preceded by a minus sign.)

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Question 32 pts

(In thousands)

Trent Pharmaceuticals invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes.

To encourage investment in R&D, Trent evaluates its division managers using EVA. The company adjusts accounting income for R&D expenditures by assuming these expenditures create assets with a two year life. That is, the R&D expenditures are capitalized and then amortized over two years.

KM division of Trent shows after-tax income of $3000 for year 2. R&D expenditures in year 1 amounted to $800 and in year 2, R&D expenditures were $1200. For purposes of computing EVA, Trent assumes all R&D expenditures are made at the beginning of the year.

Before adjusting for R&D, KM division shows assets of $9000 at the beginning of year 2 and current liabilities of $250.

Trent computes EVA using divisional investment at the beginning of the year and a 12 percent cost of capital.

Required:

Compute KM division's EVA for year 2.

(All numbers are in thousands. ENTER $1 million as 1000 do not use dollar signs or commas. If negative enter a minus sign first -1000)

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Question 41 pts

The following information was presented by Alpha Manufacturing Company for an asset purchased the previous year.

Original cost of the asset	$ 26000
Useful life of the asset	10 years
Cash flow annual operating profit	$ 6000
Salvage value	$ 0

What is the return on investment (ROI) in year 2 assuming Alpha uses the straight-line method for depreciation and beginning-of-year net book values to compute ROI?(Round your final answer to 4 decimal places. Enter 10% as .1000)